ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Regulatory Structure for Financial Stability and Development

To understand the appropriate regulatory response to a financial crisis, we start from the basic market failures that justify regulation in financial markets. Regulation that induces better outcomes by creating correct incentives for market participants is the key to reform. A combination of micro- and macro-prudential regulation can moderate pro-cyclicality, information failure and market power. Global prudential standards can push financial firms to choose safe over risky strategies, by removing the moral hazard from bailouts, and assuring firms that competitors will not adopt risky strategies either. Universal application of basic standards can prevent regulatory arbitrage. A pure principles-based regulatory approach may be too flexible, but principle-based rules retain sufficient operational flexibility and universality.



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